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China Mobile settles Anti-Monopoly Law case

28 October 2009

Mayer Brown Legal Update

On 23 October 2009 the Beijing Dongcheng District People's Court announced the settlement of an Anti-Monopoly Law (AML) case brought by an activist lawyer in Beijing against China's largest mobile network operator, China Mobile.

Zhou Ze, a lawyer with Beijing Wentian Law Firm, and one of China Mobile's 500 million subscribers, commenced proceedings against China Mobile on 4 March 2009. Zhou claimed China Mobile had engaged in unlawful price discrimination activities, in violation of AML prohibitions applicable only to business operators with a dominant market position in China.

Specifically, Zhou alleged China Mobile had charged him a 50 yuan monthly phone rental fee as part of the company's high-end "Go-tone" plan, regardless of the fact that he used his own mobile phone. China Mobile agreed to pay Zhou 1,000 yuan (approximately US$146) to withdraw the claims.

Zhou had reportedly demanded a reimbursement amount of 1,200 yuan for payments made under the plan, and an order against China Mobile to cease charging users such fees. In paying the slightly lower settlement amount, China Mobile stated that this was not a reimbursement, but instead a token of the company's gratitude for Zhou's input on pricing issues.

News of the settlement is significant, as it may be viewed as demonstrating the concerns many prominent business operators in China have about being "test cases" for AML private actions and investigations at a time when there remains a great deal of uncertainty about how the law will be applied in practice. News of the settlement will also have been read with interest by other parties who have made claims under the AML (including litigants who have brought a similar discriminatory pricing case against another state-owned enterprise, China Netcom), and may encourage China's courts and regulatory authorities to expedite finalisation of certain implementation and procedural rules that are being drafted to facilitate more transparent application of the law.

The relevant law and its enforcement status

Under Article 17 of the AML, a business operator that enjoys a dominant market position is prohibited from engaging in conduct that constitutes an 'abuse' of that position.

Dominant market position

A presumption of market dominance automatically arises under the AML in respect of business operators that have a market share in China exceeding 50%. This is likely to have applied to China Mobile, which some analysts have estimated holds a 70 per cent share of the domestic mobile telecoms market in China (although it is possible that the relevant market in which China Mobile was operating in the context of the settled lawsuit may have been defined more narrowly - to reflect the specific plan services and relatively high-end customer base concerned by the conduct).

Where a business operator is presumed dominant, it bears the onus of rebutting that presumption by submission of evidence establishing that the market is competitive and that the business operator is not able to greatly influence prevailing pricing and supply terms in the market.

Price discrimination

Article 17(vi) of the AML provides that dominant business operators who apply discriminatory treatment (including different pricing) to equivalent transaction counterparties will be deemed to have engaged in unlawful abuse conduct under Article 17 - unless they have valid reasons for their conduct.

Draft Regulations on Anti-Price-Monopoly published by China’s National Development and Reform Commission (NDRC), the regulatory body charged with administering the AML prohibitions directly relating to pricing conduct, were released on 12 August 2009. According to Article 15 of these draft regulations, a dominant business operator's transaction counterparties will be deemed 'equivalent' if they can be considered identical or sufficiently similar in terms of factors such as the transaction method, transaction sector, transaction quantity, payment settlement and after-sale services - when trading commodities of the same grade and quality.

It is also clear that unlawful price discrimination by dominant business operators can be held to exist where the same pricing terms are imposed on trading counterparties who are not 'equivalent'. This is relevant to Zhou's case, as his primary claim appears to be that all subscribers of the relevant China Mobile package were charged the same phone rental fee, regardless of whether they had their own phone.

The draft regulations also specify certain 'valid reasons' that will take discriminatory conduct outside the ambit of Article 17(vi) of the AML. These include where the relevant transaction counterparties are able to acquire the same kind of products (or substitutes) from other business operators at a reasonable price.

Accordingly, although China Mobile is understood to have a very large share of the domestic mobile telecoms market in China, it is possible the company could have been able to show that Zhou had access to reasonable alternative offers from competing mobile service providers, to defeat the claim in the context of the exceptions above.

Learnings for the business sector

In the absence of further detail about the lawsuit being publicly available, it is difficult to assess the merits of Zhou's claims against China Mobile - although it should be noted that the alleged abuse conduct is not typical of the types of discriminatory pricing claims usually litigated in courts in other jurisdictions.

In any case, it is likely that China Mobile took into account the significant uncertainties that exist in relation to application of the AML when deciding to settle the case.

In this context, it is understandable that prominent companies such as China Mobile will be wary of allowing such lawsuits to be heard by the courts at this stage, particularly as a defeat could lead to a regulatory investigation and a fine of up to 10 per cent of business turnover - and potentially significant brand damage and flow-on claims. It is also notable that draft judicial provisions released by a specialist anti-monopoly law panel within the Supreme People's Court in China indicate that the court is considering introducing a "double damages" mechanism for AML-related claims, under which successful litigants will be entitled to twice the level of damages they would normally be entitled to recover.

Another interesting feature of the case is that China Mobile is a state-owned enterprise (SOE). Various Articles in the AML have been interpreted as indicating that certain activities of SOEs may be exempt from the AML prohibitions - however China Mobile's willingness to settle this case may demonstrate that it believes its consumer pricing activities will not benefit from any such exemption.

China's main competition regulators, including the NDRC, have appeared reluctant to engage in any significant AML enforcement activities before all the key AML implementation rules and related guidance documents are finalised. However, this has not prevented private litigants from testing the boundary of the law in the interim. Numerous cases have been brought to date, against both domestic Chinese and foreign companies.

At this stage, no successful private actions have been reported, and there are signs that the courts are as reluctant as the regulators to progress the hearing of claims until the relevant implementation rules and guidance are finalised. Hopefully, widely reported cases such as the China Mobile settlement will further encourage the regulators and the Supreme People's Court to quickly finalise these documents - to facilitate more transparency and certainty in the hearing and investigation of AML claims.

In the meantime, business operators who operate in (or sell into) China should be engaging in comprehensive business reviews to ensure they identify potential AML 'risk areas' that may be tested by private litigants or reviewed by the regulatory authorities in due course. As cases such as the China Mobile settlement demonstrate, there are good reasons why business operators should be keen to avoid running the risk of being 'test cases' under the law - and it is likely the first finding of an AML violation is not too far away.

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